Insolvency & Bankruptcy Code – Towards

Achieving Full Potential

Keynote Address by Shri Shaktikanta Das, Governor,

Reserve Bank of India

At the Conference on Resolution of Stressed Assets and

Insolvency and Bankruptcy Code (IBC) organised by the
Centre for Advanced Financial Learning (CAFRAL),
Mumbai, January 11, 2024

I am very happy to be here at this Conference on Insolvency

and Bankruptcy Code (IBC), 2016 organised by the Centre for
Advanced Financial Research and Learning (CAFRAL). I wish to
congratulate CAFRAL for taking this initiative and thank them for
inviting me to this event.

2. Internationally, bankruptcy laws serve a larger public cause of

providing an avenue for recycling of capital tied up in inefficient firms
and realigning the deployment of this capital in other productive
purposes. The bankruptcy laws promote entrepreneurship in the
economy; they also provide means for distressed borrowers to
renegotiate their debt with the creditors; and creditors to exercise
their rights over borrowers in default.

3. In the Indian context, as you would be aware, our credit markets

are dominated by banks. The stressed debt held by the banks is
usually an outcome of anticipated as well as unanticipated risks that
have manifested. Wilful default or frauds are, however, a separate
category. At a systemic level, a high level of stressed debt is
generally caused by excessive leverage, poor underwriting, lax post
disbursement surveillance and other exogenous shocks that may
emerge from the real economy. Recent economic history has shown
how the above factors have contributed to high level of stressed debt
in various geographies. Even in the Indian context, we had witnessed
a huge pile up of stressed assets about a decade ago. High level of
stressed debt generates major adverse consequences in the credit
system by way of misutilisation of capital, averseness to lending and
crowding out of investments.

4. Seen from this perspective, the enactment of the Insolvency

and Bankruptcy Code (IBC) has been a landmark reform in the
economic history of India. Prior to IBC, the laws in India had brought
the legislative, executive or judicial arms of the Constitution, into
dealing with the distressed firms, in isolated manners. In this
background, the Bankruptcy Law Reforms Committee (BLRC) 1 had
strongly opined that the appropriate resolution of a defaulting firm is
a business decision, and only the creditors should make it. As a
culmination of this thinking, the IBC as we have it today lays
substantial emphasis on resolution mechanisms driven by creditors
who have been empowered to initiate insolvency proceedings

1
The Report of the Bankruptcy Law Reforms Committee (Chairperson: Dr. T K Viswanathan) - Volume I:
Rationale and Design, November 2015

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against a defaulting debtor. Such a process facilitates greater
transparency and accountability.

5. The Reserve Bank, being the regulator of a large part of the

credit ecosystem, has been a key stakeholder in the implementation
of the IBC. The RBI has taken several measures dovetailed into the
IBC, with a focus to resolve large value stressed accounts. The RBI
was conferred with an explicit role in leveraging the IBC as the
primary tool for resolution of large legacy stressed assets. The
amendments to the Banking Regulation Act, 1949 carried out in 2017
inserted a clause that authorised the Reserve Bank to issue
directions to any bank to initiate corporate insolvency resolution
process (CIRP) in respect of a default, under the provisions of the
IBC. Accordingly, leveraging these powers, the Reserve Bank issued
directions for initiation of CIRP proceedings in 41 specific cases of
default 2.

6. The other significant implication of the IBC from a regulatory

perspective was a shift towards a more principle-based approach as
far as out of court resolution is concerned. All existing schemes of
restructuring of loans were substituted by a simple and harmonised
framework for resolution under the Prudential Framework which was

2
RBI had issued directions to banks in June 2017, to initiate insolvency proceedings under IBC against 12 of the
largest Corporate Debtors classified as non-performing asset at that point in time. This was followed up with a
second set of directions in August 2017, requiring banks to implement resolution plans, in respect of 29 other
stressed Corporate Debtors by December 13, 2017, failing which insolvency proceedings had to be initiated against
them.

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issued by the Reserve Bank on June 7, 2019. The harmonised
framework provided discretion to lenders for designing and
implementing resolution plans in respect of borrowers in default,
subject to evaluation of commercial viability. The resolution plan
could also include filing of CIRP applications under the IBC. In
respect of large value borrowers, i.e., where aggregate exposure of
banks is in excess of ₹1500 crore, disincentives have been
prescribed in the form of additional provisions to be made for delayed
implementation of resolution plans. Several of these accounts have
since been resolved under the IBC.

Stocktaking of the implementation of the IBC

7. If we have to take stock of the implementation journey of the

IBC and its impact so far, there are significant positive indications as
well as learnings, suggesting the need for some course correction.
Let me first highlight the positive aspects in terms of (i) nature of
resolution; (ii) realisation of value; and (iii) behavioural shift.

8. In terms of nature of resolution: Since its inception, 7,058

corporate debtors (CDs) 3 have been admitted into the CIRP, of which
5,057 cases have been closed and 2,001 corporate debtors are
under various stages of resolution. Of the cases which have been
closed, around 16 per cent have yielded successful resolution plans;

3
Data compiled from IBBI Quarterly Newsletter for July-September’ 2023

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19 per cent have been withdrawn under Sec 12A of IBC, where
largely the debtors agreed for full or partial settlement with the
creditors; 21 per cent were closed on appeal or review; and in 44 per
cent of the cases, liquidation orders have been passed. Putting
together the 16 per cent cases which had successful resolution plans
and the 19 per cent of cases where the CDs agreed for settlement, it
can be said that 35 per cent of the total CIRP cases saw the positive
impact of the IBC.

9. A fine combing of the data would indicate that 77 per cent of the
cases which ended in liquidation were inherited from the earlier Board
for Industrial and Financial Reconstruction (BIFR) regime or were
already defunct units where substantial value erosion had taken
place before their admission under IBC. In fact, the Code has
provided all these legacy cases a means for an orderly exit. To
illustrate further, 38 per cent of the CIRPs which yielded a successful
resolution were earlier with the BIFR and/or were defunct; and if not
for IBC, their fate would have perhaps remained uncertain till now.

10. The data published by the IBBI suggests that there has been an
increase in the number of CIRPs resulting in resolution as a
percentage of liquidation orders going up from 21 per cent during FY
2017-18 to 45 per cent during FY 2022-23. This reflects a steady
tilting towards resolution option under the IBC and highlights the

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increased acceptance of the IBC as an appropriate statutory umbrella
for turning around viable firms.

11. Even in other segments of the financial sector, entities such as

the non-banking financial companies (NBFCs), the IBC has provided
an effective enabler for resolution of stressed entities. I am referring
to section 227 of the Code, which was operationalised through a
separate notification for resolution of certain Financial Service
Providers in 2019 4. The RBI has been able to leverage this
mechanism to undertake resolution of a few major stressed NBFCs
in the recent past, with minimal disruption to the overall financial
system.

12. In terms of realization of value: Creditors have realised ₹3.16

lakh crore out of the admitted claims of ₹9.92 lakh crore as of
September 2023, which works out to a recovery rate of 32 per cent.
It needs to be emphasized here that significant value destruction
would have already happened in these assets prior to their admission
under the IBC. Further, a comparison of realised value with admitted
claims may not be a reasonable indicator of the effectiveness of the
resolution process. Rather, the resolution value may be compared
with the liquidation value of stressed assets or the fair value at the
time of admission into IBC. When evaluated from the prism of these

4
In exercise of the powers conferred by section 227 of the IBC, Government issued the notification SO. 4139(E)
dated November 18, 2019, enabling resolution of non-banking finance companies (including housing finance
companies) with asset size of Rs.500 crore or more, under the provisions of IBC.

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two parameters, namely, the liquidation value and the fair value, the
realization rates are 169 per cent and 86 per cent respectively which
appears quite encouraging.

13. In terms of behavioural shift: The most interesting outcome

of the IBC has been the substantial behavioural shift ushered in by
the Code. This is evident from the 26,518 applications for initiation of
CIRPs having total underlying default of ₹9.33 lakh crore which were
withdrawn before admission, till August 2023. The credible ‘threat of
insolvency’ ignited by the Code has strengthened the negotiating
powers of the creditors, in the absence of which it is most likely that
those defaults would have lingered for much longer, resulting in value
destruction. It has to be stated here that the IBC should not be seen
as merely a loan recovery instrument; it has to be seen as an
instrument which facilitates preservation of economic value of assets
through effective resolution or unlocking of capital which is stuck in
unviable businesses.

Challenges and Way Forward

14. If all is good about the implementation of the Code, then where
is the criticism coming from? In general, the criticisms of the IBC are
on two fronts – the time taken for resolution and the extent of haircuts
vis-à-vis the admitted claims. I have already shared my perspectives

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on the haircut part. Let me now share some thoughts on the delay
part.

15. The Code envisages a time bound process, requiring the

completion of CIRP within 180 days, with a one-time extension by up
to 90 days in exceptional circumstances. The data published by the
IBBI 5, however, raises certain serious concerns. As of September
2023, 67% of the ongoing CIRP cases have already crossed the total
timeline of 270 days including possible extension period of 90 days.
More concerning is the fact that, the average time taken for admission
of a case during FY 2020-21 and FY 2021-22 stood at 468 days and
650 days respectively. Such long degree of delays will substantially
erode the value of the assets. There are multitude of factors playing
out here, namely, the evolving jurisprudence related to the Code;
litigatory tactics adopted by some corporate debtors; lack of effective
coordination among the creditors; bottlenecks in the judicial
infrastructure, etc. I would wish to touch upon some of these issues
along with thoughts on the possible way forward. I have four specific
points to make.

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Insolvency and Bankruptcy Board of India (IBBI) is the regulator established under IBC and is responsible for
implementation of the Code.

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(a) Realigning the dynamics between the Creditors
and Corporate Debtors

16. The IBC transfers full control of the Corporate Debtors to the
creditors during the period of CIRP, through the resolution
professional. The rationale for the same is to prevent any erosion of
value during the process of resolution. Given the loss of saddle, we
see the promoters of the debtors in many cases resorting to various
litigatory tactics. While there could be bonafide reasons in some
cases, other kinds of intent are also visible in the market. To minimize
this friction, there has been an institutional attempt towards adopting
the prepack schemes which is essentially a debtor-in-possession
model. Globally, pre-packs have evolved organically without statutory
interventions, because in those countries, the insolvency regimes
had stabilized. In such predictable scenarios, the judiciary’s role is
rather limited because the Courts generally approve the resolution
plans after verifying compliance with the laid down tenets.

17. In the Indian context, to start with, the Pre-Packaged Insolvency

Resolution Process (PPIRP) has been rolled out for the MSMEs. The
response towards its adoption, however, seems to be relatively
muted. One reason could be the hesitancy on the part of the financial
creditors (FCs) in approving the proposals under this mechanism,
wherein the haircut is perceived as voluntary. It may be stressed here
that PPIRP will incentivise the promoters to constructively engage
with the creditors, possibly even before occurrence of any default

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event. This would facilitate swift and smoother resolutions, avoiding
unnecessary adversarial litigations. Overall, this could be a win-win
situation for both creditors and debtors. Once this perception is
established, there could be a greater acceptance of this mechanism
for larger corporate debtors as well, as and when the statutory
enablers are in place. Thus, in their own interest, the creditors and
debtors may consider adopting PPIRP in applicable scenarios based
on prudentially realistic cost-benefit evaluations.

18. From the Reserve Bank’s side, we are cognisant of the

limitations of the out of court resolution framework, in particular the
coordination issues since a large part of the creditor universe like
mutual funds, insurance companies and other bond/debenture
holders, etc. is outside the scope of our Prudential Framework for
Resolution of Stressed Assets. Hence, we have a special interest in
effectively dovetailing the out of court workouts conceived under our
Prudential Framework with that of the IBC. The PPIRP could be a
potential game changer in this regard.

(b) Reaffirming the financial creditor’s role

19. Through the course of last seven years of implementation of the

Code, the jurisprudence on the role of the Committee of Creditors
(CoC) has evolved. The CoC has a fiduciary responsibility to
safeguard the interests of all stakeholders. The success of the Code
is linked to an active involvement of the CoC in driving the resolution

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process forward. On several occasions, however, the Adjudicating
Authorities (AA) have raised concerns regarding the conduct of the
CoC in the insolvency proceedings. This includes lack of participation
in the CoC meetings; lack of engagement or effective coordination
among creditors; disproportionate prioritisation of individual interest
of creditors rather than their collective interest while designing the
resolution plans which can be detrimental to the resolution plan itself,
etc.

20. Given these shortcomings on the part of CoC, there appears to

be a trend in recent years towards balancing the rights of Operational
Creditors (OCs) with those of Financial Creditors (FCs) under the
Code. While the focus on ensuring equity among all stakeholders
may be appreciated, there needs to be some distinction in weightage
attributed to different category of creditors, depending upon the
degree of risk absorbed ab initio. It has to be recognised that the
financial creditors take the maximum risk and hence their risk needs
to be commensurately compensated and with priority. Accordingly,
any amendments to the Code and its evolution thereof may continue
to lay emphasis on a financial creditor-led resolution framework, in
an overarching manner.

(c) Envisaging a Group Insolvency Mechanism

21. While the insolvency mechanism has been graduating towards

a zone of stability through various concerted measures, one visible

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impediment seems to be the absence of a clear framework for group
insolvency. Globally, there are two diverse facets of Group
Insolvency. Some jurisdictions have adopted either procedural
coordination or substantive consolidation. Substantive consolidation
pertains to the consolidation of assets, liabilities, and operations of
multiple entities within a group, disregarding their separate legal
entity status. On the other hand, under procedural coordination, the
approach is limited to aligning procedural aspects like filing
requirements, timelines, coordination, etc., and not mingling the
entities per se.

22. In the Indian context, in the absence of a specified framework,

the group insolvency mechanism has been so far evolving under the
guidance of the Courts. Perhaps the time has come for laying down
appropriate principles in this regard through legislative changes.
There has been quite a bit of brainstorming on this issue in the policy
circles for some time now. The task now is to move forward through
appropriate legal changes.

23. While a legal framework cannot envisage all plausible real world
scenarios, given the complicated group structures at the ground level
including cross border linkages, it may be in the fitness of things to
formally conceive a framework to start with. There would be
challenges in this journey like intermingling of assets, devising a
definition of ‘Group’, addressing cross-border aspects, etc. It would

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still be preferable to see the opportunity here and put in place a
workable framework for group insolvency.

(d) Developing a vibrant secondary market for stressed assets

24. One major impediment for implementing a successful resolution

plan has been the absence of a vibrant market for stressed assets in
the country. This effectively limits the pool of prospective resolution
applicants for stressed assets under IBC. In fact, this applies to even
our regulated entities when they transfer their stressed assets
outside the IBC process. A robust secondary market in loans can be
an important mechanism for management of credit exposures by the
lending institutions.

25. It is in this pursuit that certain measures have been taken by the
Reserve Bank. The Master Directions on Transfer of Loan Exposures
issued on September 24, 2021 lay down a comprehensive regulatory
framework for transfer of loan exposures by banks, NBFCs and All
India Financial Institutions (AIFIs). In particular, an enabling
framework has been put in place for transfer of stressed loan
exposures to a wider set of market participants, subject to specified
conditions. We are also currently in the process of formulating a
framework for securitization of stressed assets, for which a
Discussion Paper has been issued in January, 2023.

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26. From an institutional perspective, the Reserve Bank has
brought together a core group of major banks to set up a Self-
Regulatory Body – i.e. Secondary Loan Market Association (SLMA).
The self regulatory body is expected to play an important role in
standardisation of documentation and market practices; setting up
the market infrastructure; promoting liquidity, efficiency and growth of
the secondary market in alignment with broad regulatory objectives.

27. These measures are expected to facilitate the transfer of credit

risk originating in the banking sector and ensure market-based credit
products for diversified set of investors. Undoubtedly, the
germination of an active secondary market ecosystem will have
consequential benefits for the IBC mechanism.

Conclusion

28. Apart from what I have highlighted, there are several other
aspects which merit attention. These would include leveraging
technology to optimise the disposal of cases, strengthening the
judicial infrastructure, regular stakeholder awareness programmes
and the like. From the Reserve Bank’s side, we have also been
consistently engaging with the stakeholders to understand their
thought process on the emerging challenges to arrive at likely
solutions.

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29. The recent/steady improvement in the asset quality of the
banking sector can be attributed to a multitude of factors including
the introduction of the IBC. A law is only as good as its
implementation. The Reserve Bank would continue to have focussed
interest in the orderly and sustained evolution of the IBC ecosystem.

I thank you all for hearing me with patience.

Thank you. Namaskar!
*****

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